honeycfa

Washington, Inc.’s stock transactions during the year 20X4 were as follows:

January 1	720,000 shares issued and outstanding
May 1	2 for 1 stock split occurred

What was Washington’s weighted average number of shares outstanding during 20X4, for earnings per share (EPS) computation purposes?

A) 1,500,000.

B) 1,440,000.

C) 1,666,667.

---

The January 1 balance is adjusted retroactively for the stock split and (720,000 × 2 =) 1,440,000 shares are treated as outstanding from January.

honeycfa

A firm has a weighted average number of 20,000 common shares selling at an average of $10 throughout the year and 11,000, 10%, $100 par value preferred shares. If the firm earns $210,000 after taxes, what is its Basic EPS?

A) $7.50 / share.

B) $5.00 / share.

C) $10.50 / share.

---

(210,000 ? 110,000) / 20,000 = $5 share

honeycfa

Zichron, Inc., had the following equity accounts on December 31:

• Common stock: 20,000 shares.

• Preferred stock A: 10,000 shares convertible into common on a 2 for 1 basis, dividend of $40,000 was declared during the year.

• Preferred stock B: 10,000 shares, convertible to common on a 4 for 1 basis, dividend of $5,000 was declared during the year.

• The company reported net income of $120,000 and paid a $20,000 dividend to its common shareholders.

What are the basic earnings per share reported for the year?

A) $2.75.

B) $3.75.

C) $2.00.

---

($120,000 ? 40,000 ? 5,000) / 20,000 shares = $3.75.

---

What are the diluted earnings per share reported for the year?

A) $1.50.

B) $3.00.

C) $1.33.

---

($120,000) / (20,000 + 20,000 + 40,000) = $1.50.

honeycfa

An analyst gathered the following information about a company:

• 01/01/04 - 50,000 shares issued and outstanding at the beginning of the year
• 04/01/04 - 5% stock dividend
• 10/01/04 - 10% stock dividend

What is the company’s weighted average number of shares outstanding at the end of 2004?

A) 57,500.

B) 55,000.

C) 57,750.

---

The weighted average number of common shares outstanding is the number of shares outstanding during the year weighted by the portion of the year they were outstanding. Dividends and splits are applied to all shares issued or repurchased and all original or adjusted shares outstanding prior to the split or dividend.

Step 1) Apply the 04/01/04 dividend to the beginning-of-year shares: Adjusted shares = 1.05 × 50,000 = 52,500

Step 2) Apply the 10/01/04 dividend the adjusted beginning-of-year shares. Adjusted beginning of year shares = 57,750 (= 1.1 × 52,500).

Step 3) Compute the weighted average number of shares. 57,750 × (12/12) = 57,750 shares.

honeycfa

Last year, the AKB Company had net income equal to $5 million. Combined state and local taxes were 45%. The firm paid $1 million to holders of its 1 million common shares and $250,000 to 100,000 preferred shareholders. What was AKB's earnings per share (EPS) last year?

A) $4.75.

B) $2.25.

C) $2.50.

---

EPS = earnings available to common shareholders divided by the weighted average number of common shares outstanding. Earnings available to common shareholders is net income minus preferred dividends, or $4,750,000 (= $5 million – 250,000) for AKB.

honeycfa

An analyst gathered the following information about a company:

• 01/01/06 - 20,000 shares issued and outstanding
• 04/01/06 - 5.0% stock dividend
• 07/01/06 - 5,000 shares repurchased
• 10/01/06 - 2:1 stock split

What is the company’s weighted average number of shares outstanding at the end of 2006?

A) 47,000.

B) 39,500.

C) 37,000.

---

The end-of-period weighted average number of common shares outstanding is the number of shares outstanding during the year weighted by the portion of the year they were outstanding. Dividends and splits are applied to all shares issued or repurchased and all original or adjusted shares outstanding prior to the split or dividend.

Step 1) Apply the 04/01/06 dividend to the beginning of year shares:

Adjusted shares = 1.05 × 20,000 = 21,000

Step 2) Apply the 10/01/06 split to the adjusted beginning-of-year shares and the repurchase.

Adjusted beginning-of-year shares = 42,000 (= 2 × 21,000)
Adjusted repurchase = 10,000 (= 2 × 5,000)

Step 3) Compute the weighted average number of shares.

42,000(12/12) - 10,000(6/12) = 37,000 shares

honeycfa

A company has the following sequence of events regarding their stock:

• One million shares outstanding at the beginning of the year.
• On June 30th, they declared and issued a 10% stock dividend.
• On September 30th, they sold 400,000 shares of common stock at par.

Basic earnings per share at year-end will be computed on how many shares?

A) 1,000,000.

B) 1,200,000.

C) 1,100,000.

---

honeycfa

LOS g, (Part 2): Calculate a company's earnings per share (both basic and diluted earnings per share) for both a simple and complex capital structure.

 

Lawson, Inc.’s net income for the year was $1,060,000 with 420,000 shares outstanding. Lawson has 2,000 shares of 8%, $1,000 par value convertible preferred stock that were outstanding the entire year. Each share of preferred is convertible into 50 shares of common stock. Lawson's diluted earnings per share are closest to:

A) $1.94.

B) $2.04.

C) $2.14.

---

Lawson’s basic EPS ((net income – preferred dividends) / weighted average common shares outstanding) is ($1,060,000 – (2,000 × $1,000 × 0.08)) / 420,000 = $2.14. To calculate diluted EPS the convertible preferred shares are presumed to have been converted, the preferred dividends paid are added back to the numerator of the EPS equation, and the additional common shares are added to the denominator of the equation. Lawson’s diluted EPS is $1,060,000 / (420,000 + 100,000) = $2.04.

honeycfa

Selected information from Able Company’s financial activities is as follows:

• Net Income was $720,000.
• 1,000,000 shares of common stock were outstanding on January 1.
• 1,000 shares of 8%, $1,000 par value preferred shares were outstanding on January 1.
• The tax rate was 40%.
• The average market price per share for the year was $20.
• 6,000 shares of 3%, $500 par value preferred shares, convertible into common shares at a rate of 40 common shares for each preferred share, were outstanding for the entire year.

Able’s basic and diluted earnings per share (EPS) are closest to:

Basic EPS

Diluted EPS

A) $0.64 $0.47

B) $0.55 $0.52

C) $0.55 $0.55

---

Able’s basic earnings per share (EPS) ((Net Income ? Preferred Stock Dividends) / weighted average shares outstanding) for 2004 was (($720,000 ? ($500 × 6,000 × 0.03) ? ($1,000 × 1,000 × 0.08)) / 1,000,000 =) $0.55. If the convertible preferred were converted to common stock on January 1, (6,000 × 40 =) 240,000 additional shares would have been issued. Also, dividends on the convertible preferred would not have been paid.

So we have diluted EPS was ($720,000 ? 80,000) / (1,000,000 + 240,000) = $0.52.

honeycfa

During 2004, Covax Corp. reported net income of $2.4 million and 2 million shares of common stock. Covax paid cash dividends of $14,000 to its preferred shareholders and $30,000 to its common shareholders. In 2004, Covax issued 900, $1,000 par, 5.5 percent bonds for $900,000. Each bond is convertible to 50 shares of common stock. Assume the tax rate is 40%. Compute Covax’s basic and diluted EPS.

Basic EPS

Diluted EPS

A) $1.19 $1.22

B) $1.19 $1.18

C) $1.22 $1.22

---

2004 Basic EPS:

2004 Diluted EPS: